Intensive efforts are being made behind the scenes to forge a rescue package for ArcelorMittal South Africa’s (Amsa) threatened steel mills.
Business Times understands that trade, industry & competition minister Parks Tau and finance minister Enoch Godongwana have set up a team to draft a rescue package of up to R1bn.
Amsa announced three weeks ago it would be winding down its long-steel plants in Newcastle and Vereeniging, which could cause 3,500 direct job losses and put another 25,000 jobs in the steel value chain at risk.
The crisis has jolted the government into action to seek an arrangement to keep the business going and resuscitate a sector that has been ailing for decades.
Those privy to the Treasury-DTIC discussions have told Business Times that the Public Investment Corp (PIC), the Industrial Development Corp (IDC) and even the Unemployment Insurance Fund (UIF) could be tapped as part of the rescue package.
But one senior government source with knowledge of the talks said there was some opposition to a bailout because there was no guarantee Amsa would not come back later for more.
If we were to do all these things, what guarantee do we have that next year they are not going to come and say, ‘Give us more’?
— Senior government source
“Over the years the government has been moving backward and forward to try and accommodate it by increasing the steel tariff,” the source said.
“Even where they were making profits, they were still not investing in upgrading the plants. If we were to do all these things, what guarantee do we have that next year they are not going to come and say, ‘Give us more’?”
This official said the solution lay elsewhere, not in a bailout. An alternative plan would be put on the table soon.
The IDC, an Amsa minority shareholder, has previously injected R1bn to keep the company afloat. It said earlier this month it would investigate further possible solutions in line with its commitment to expand the South African steel sector. This week the development finance institution said it was still engaging relevant stakeholders.
The PIC on Friday said requests for it to participate in rescue efforts at Amsa would be considered on their merits and the asset manager would do what was in the best interest of its clients and their beneficiaries.
“The PIC recognises the ramifications of the Amsa decision to wind down some of its operations in the country. The PIC is an insignificant minority shareholder in Amsa with an equally insignificant role in any discussions in this regard.”
Speaking to the SABC at the World Economic Forum in Davos, Tau said the government was talking to various companies about the challenges facing the steel industry in Vereeniging and Newcastle to find a way of averting the potential jobs bloodbath.
He confirmed having met Amsa chair Lakshmi Mittal at the gathering, alongside Godongwana and mineral & petroleum resources minister Gwede Mantashe.
“We’ve met with various businesses, a lot of them located in South Africa,” Tau said. “They’ve got investments in South Africa. Multinational companies. These range from Anglo American to De Beers to countries that have expressed appetite to invest in the country.
“We have met with the Mittal family, the chairman of ArcelorMittal, as the three ministers ... We’ve had discussions on how to begin solving the problems… and how to ensure that we avert what could be a jobs bloodbath.”
Amsa’s Newcastle works in northern KwaZulu-Natal is among the country’s foremost suppliers of products used in mining, energy generation and rail infrastructure.
But government policies favouring mini-mills that use scrap metal have hobbled Amsa’s primary steelmaking business. The scrap preferential pricing system allows mini-mills to buy scrap at discounts of up to 40% on international prices, and the 20% export duty on scrap metal further advantages mini-mills over integrated steel producers such as Amsa.
Tau’s deputy minister, Zuko Godlimpi, has acknowledged industrial policy has not succeeded in shielding the steel industry.
“The South African economy is deindustrialising,” he said in parliament. “You can start in 2005 or you can push it back to about 40 years ago. The discussion is about what could have been done or what can be done to first reverse the trend and then put it [on an upward trajectory]. That’s where domestic demand comes into the equation.”
He said the state needed to encourage the private sector to participate in infrastructure-led activities to grow the economy.
“If Transnet wants to build 30,000km of rail lines for the next 15 years between South Africa and, say, Angola, it means even private sector capital owners will be interested in designing their own investment to be in line with [Transnet], because they know the state will be buying this, that and the other.”
The director-general of the DTIC, Malebo Mabitje-Thompson, also admitted in parliament recently that South Africa had been slow to act on protecting its steel industry and was playing catch up as other markets benefited from strong state intervention.
“We are playing in sectors where countries are throwing everything [behind their industries]. Our level of concessionality is almost nothing compared to what they can do. What the US is able to do by just stopping Chinese imports through an act [is more than] we will ever do by putting an incentive in the kitty.”
A research paper by Trade and Industrial Policy Strategies (Tips) — an industrial think-tank — said the economic implications of local procurement of steel were significantly different for crude steel than for more advanced products.
“Steel manufacturing has two main phases; basic refining by ArcelorMittal South Africa and the mini-mills, and more advanced downstream manufacturing that processes crude steel into inputs for construction and infrastructure, as well as machinery, plus basic household products such as hand tools and kitchenware.”
The think-tank said crude steel production in South Africa had faced a crisis for the past 20 years. Demand had been flat for 50 years while exports had plummeted since the mid-2000s.
“The impact has differed sharply, however, for flat and long steel. In long steel, imports remained low, at around 5% of total use in South Africa. Around a dozen new mini-mills emerged, expanding their market share by undercutting the historically dominant producer, Amsa, and increasing exports.”
Flat steel imports climbed to around a third of domestic use and this trend led to falling production at Amsa, the Tips study said.
It said the system of designations and tariffs should be reviewed to ensure significant support to downstream manufacturing and to improve monitoring and enforcement. Legislation should be designed to ensure designations apply as far as possible to third-party suppliers of infrastructure.
“Opportunities should be explored to improve competitiveness in raw materials, electricity, and freight along the steel value chain. A priority should be measures to reduce production costs for crude steel.
“The potential for linking licensing and access to network infrastructure for private providers of public infrastructure should be explored. These measures would have to take into account evidence about the potential impact on profitability.”
The Tips report said implementing agencies, including the DTIC and the IDC, should ensure there was capacity to improve tender planning, communication and monitoring to identify products that can be produced domestically without imposing excessive costs on infrastructure projects.
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